Farkas Indictment May Signal Other Tarp Cases

WASHINGTON — The government announced a massive indictment Wednesday against the former head of Taylor, Bean & Whitaker, alleging a widespread fraud of nearly $2 billion that, officials said, helped trigger the biggest bank failure of 2009.

In a 16-count indictment, the Justice Department alleged Lee Bentley Farkas, the mortgage lender's founder and former chairman, abused Taylor Bean's business relationship with the $25 billion-asset Colonial BankGroup, faked loans to help mask problems at both companies and attempted to help Colonial dupe the Troubled Asset Relief Program.

If found guilty of all counts, Farkas, who was arrested Monday, could face a maximum prison term of more than 400 years. The government said it was seeking $22 million in forfeiture.

"The fraud alleged here is truly stunning in its scale and complexity," Assistant Attorney General Lanny Breuer said at a press conference announcing the charges, which were accompanied by a civil complaint against Farkas by the Securities and Exchange Commission.

Colonial and Taylor Bean had an extensive warehouse credit relationship, in which the bank provided Taylor Bean with continuous liquidity to make loans.

That relationship began to go awry in 2002, the government said, as Taylor Bean began having cash problems. According to court filings, Farkas and others ran overdrafts on Taylor Bean's accounts at Colonial, compelled the bank to buy over $400 million in fake loans from Taylor Bean and hid distressed Taylor Bean loans that the lender could not sell. Under the arrangement, Colonial, which failed in August 2009, held loans on its books at face value when in reality they were worthless.

The alleged fraud was detected as a result of Colonial's Tarp application, in which it sought $570 million from the Treasury Department. Regulators agreed to give it the money, but only if raised $300 million in private capital.

The authorities allege Farkas, who led the effort to find private investors, falsely told the bank that sufficient capital was in place. But the court filings say the investment was a sham. Even though Farkas and other conspirators claimed $30 million had been placed in escrow, officials said most of the funds were improperly diverted from a Taylor Bean subsidiary.

"The Tarp application is exactly what triggered this investigation," said Neil Barofsky, the special inspector general for Tarp, in an interview Wednesday.

Farkas's attorney did not return phone calls seeking comment.

Farkas was the second executive arrested in connection with a Tarp application. In March, Charles Antonucci, the former chief executive of the failed Park Avenue Bank in New York, was arrested for allegedly lying in his bank's application for Tarp funds.

Barofsky said Colonial's Tarp request drew the attention of his office after the bank announced it had received approval for the funds without mentioning that the approval was conditional. Taylor Bean's offices were raided by authorities in August 2009, and its bankruptcy was announced within days of Colonial's failure. The bank never received the funds.

"As we started digging deeper and deeper, we saw that not only was there suspected fraud related to Colonial's Tarp application, but a far broader fraud, really the fraud that made it necessary for Farkas to seek Tarp funds, to fill the hole that he and co-conspirators at Colonial had created at Colonial," Barofsky said. "By every definition, the Tarp aspect of this case is why there was an investigation."

No charges were announced against executives at Colonial, yet Barofsky said the investigation continues. He said that although the Treasury agreed to give Colonial the money, he noted it participated in the investigation.

"Treasury was very responsive when we let them know about this investigation and helped us to make sure the taxpayer wouldn't be on the hook," he said.

More Tarp-related cases of a similar magnitude could still be forthcoming, Barofsky said.

"It wouldn't surprise me if we see other investigations of a similar size and scope," he said.